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The Fed this summer will take another step in developing a digital currency

This makes more sense than bitcoin....
...the moves of multiple countries, most prominently China, in the central bank digital currency (CBDC) space has intensified talk about how aggressively the Fed should move. China’s progress has stirred worries that it could undermine the dollar’s position as the global reserve currency.

Powell referenced the growing popularity of digital currencies like bitcoin, though he said they remain inefficient payment mechanisms. Stablecoins, which are tied to specific currencies, offer other advantages.

“Technological advances also offer new possibilities to central banks — including the Fed,” Powell said. “While various structures and technologies might be used, a CBDC could be designed for use by the general public.”
CBDC

Comments

  • My limited knowledge of the subject tells me “Stablecoins” are not Bitcoin or Blockchain. Bitcoin’s purpose is not a “currency”.

    When I first read Powell’s commentary, my initial thought was… I wonder if they’ll create something called a “debit card” where you could pay for goods with a currency that was tied to the fiat in your digital bank account… Wait - I thought we had that. Maybe I’m missing something…

    A nationalized central digital bank. I wonder how the current banking system will react to this development that is projected to take 3 years or so to develop. It will be interesting to watch. It seems the train has already left the station.
  • NOT a good thing. But no one wants to listen to ME. And so, I retired early. SO happy, once I did that.
  • edited May 22

    My limited knowledge of the subject tells me “Stablecoins” are not Bitcoin or Blockchain. Bitcoin’s purpose is not a “currency”.

    My armchair perspective is that bitcoin and its cousins are mostly useful for money laundering, for speculation, and for increasing both the value of energy investments and the rate of global warming via their high energy demands. Also, bitcoin has found limited usefulness as a "currency" (Elon Musk dabbled in it as a payment method for several weeks).

    CBDCs hold more promise for offering something secure and socially useful. Here is a quick look at a few potential benefits:
    Central bank digital currency advocates...cite multiple advantages. Paramount among those reasons is giving unbanked people access to the financial system.

    There’s also a speed consideration. Transfer payments, such as those provided by governments to people during the Covid-19 crisis, would be made faster and easier if that money could be deposited directly into digital wallets.

    “New forms of digital money could provide a parallel boost to the vital lifelines that remittances provide to the poor and to developing economies,” Kristalina Georgieva, managing director at the International Monetary Fund, said in recent remarks at a joint meeting with the World Bank. “The biggest beneficiaries would be vulnerable people sending small value remittances: those most at risk from being left behind by the pandemic.”

    Potential losers from the digital currencies include some financial institutions, both in traditional banking and fintech, that could lose deposits due to people putting their money into central bank accounts.
    Digital Dollars
  • edited June 12
    More detail on the debate surrounding the Fed's look into releasing a CBDC.
    Neha Narula, who’s leading the effort at MIT to work with the Boston Fed on a central bank digital currency, called the project “a once-in-a-century opportunity to redesign the dollar” in a way that supports innovation much like the internet did.
    But.....
    “The United States should not implement a [central bank digital currency] simply because we can or because others are doing so,” the American Bankers Association said in a statement to lawmakers this week. The benefits “are theoretical, difficult to measure, and may be elusive,” while the negative consequences “could be severe,” the group wrote.
    Fed explores ‘once in a century’ bid to remake the U.S. dollar
  • Okay, so we don't want people investing their social security taxes in the stock market (too risky they say) but we'll create this phantom source of value which fluctuates based on the whatnot for them to play with. Good plan.
  • edited June 12
    Its my understanding the value of the digital dollar being considered would be tied to the value of a paper dollar, that each digital dollar would become part of the overall money supply, and that each digital dollar would have the same "full faith and credit" backing that a paper dollar does. If so, the potential for additional instability would be limited to any increase associated with the existence of that digital dollar along side the paper dollar. I assume that is part of what the MIT study is examining.....
  • edited June 12
    China has been working on the development of a national digital currency since 2014.
    In 2020, China started real-world trials for the digital yuan in several major cities.
    Increasing international use of the yuan is one of their primary goals.
    This may potentially threaten the U.S. dollar's position as the world's reserve currency.
    The U.S. should conduct a thorough cost/benefit analysis to determine if the usage of "digital dollars" would be advantageous.

  • Thank you @davfor and @Observant1. That I can understand. Not sure that I will ever have any use for it but I do understand it better.
  • As it is now, if any level of government desires to separate you from any of your cash which is stashed in banks or cash accounts of any type they are required to go through a number of legal processes. during which you will at least be aware of the situation, and may even have the ability to contest the situation. Worst case, you can keep your cash in the form of physical banknotes.

    Once your cash becomes nothing more than a digital entry in some governmental database you may be relieved of it instantaneously, legitimately or not, perhaps without a trace of whatever hacking enterprise cracks the system. AND THEY WILL.
  • Old_Joe said:

    As it is now, if any level of government desires to separate you from any of your cash which is stashed in banks or cash accounts of any type they are required to go through a number of legal processes. during which you will at least be aware of the situation, and may even have the ability to contest the situation. Worst case, you can keep your cash in the form of physical banknotes.

    Once your cash becomes nothing more than a digital entry in some governmental database you may be relieved of it instantaneously, legitimately or not, perhaps without a trace of whatever hacking enterprise cracks the system. AND THEY WILL.

    @Old_Joe is COMPLETELY correct. The Marshall Islands and Venezuela and China and others are deliberately investigating or already have moved to create this digital currency stuff. I just shake my head. I read, in the case of The Marshall Islands, that the new digital currency will be a country-specific new Sovereign. A break from the currently-used US dollar. Although surely, paper dollars will not be instantaneously made to be illegal and unacceptable--- you can bet.
  • Call me dense on this subject, but ISTM we already have virtual dollars. Years ago, when the government printed money, it really printed it. Now the Fed just adds virtual dollars electronically to banks' reserves. Voila, instant, albeit virtual, cash. Obviously these virtual dollars are tied to "real" dollars because they're denominated in real dollars.

    https://www.investopedia.com/articles/investing/081415/understanding-how-federal-reserve-creates-money.asp
    https://www.stlouisfed.org/open-vault/2017/november/does-federal-reserve-print-money

    The Digital Dollar piece linked to above claims that "Transfer payments, such as those provided by governments to people during the Covid-19 crisis, would be made faster and easier if that money could be deposited directly into digital wallets."

    "Digital" currency wouldn't have made them go any faster, because the payments were already made electronically at least to some recipients.

    What we don't have (yet) are virtual wallets. So called "virtual wallets" now are just software layered upon existing payment systems.

    A prepaid, rechargeable card comes close to a virtual wallet. Conceptually, it stores cash value on the card, like a physical wallet stores paper money. Potential loss is limited to the amount on the card, as is potential loss from having a "real" wallet stolen. They can be recharged with cash without using a bank. (I suspect the reality is that prepaid cards still rely on being connected to a server. That would mean less anonymity than advertised, and a greater possibility of failure as compared with pulling a dollar bill out of your wallet.)

    In short, so long as "virtual" dollars are linked to "real" dollars, I don't see a big difference between them and the current, largely virtual system. There are significant concerns (notably in privacy and access) with a cashless society. But that's a different question, one that arises as virtual dollars supplant physical money.
  • ...Not to mention ransomware attacks or crippling cyber-attacks which could totally F*** the economy. ...
  • edited June 13
    Looking through the comments here and doing some more reading this morning leaves me thinking it is good the Fed is taking a go slow approach. Here are a few takeaways....

    A Center For Strategic and International Studies (CFSAIS) report indicates most of the worlds central banks have reached the experimental or pilot development phase of their examinations of CBDC use. The report indicates "The case for CBDC is based in large part on the underlying technology’s potential to improve payments efficiency and lower transaction costs, particularly for cross-border payments, as well as to bolster system integrity, spur financial innovation, and improve access to financial services."

    The CFSAIS report also suggests that China's digital currency electronic payment (DCEP) program is significantly "motivated by concern that private digital payment platforms could displace traditional banks—posing a threat to financial stability and official sector oversight of economic and financial activity in China." Relatedly, a recent Asia Times article notes that "DCEP serves as a tool for the Chinese government to regain control over domestic financial crime, stabilize the financial system and protect China’s national security. Unlike many anonymous and decentralized cryptocurrencies, the DCEP is monitored and backed by the PBOC, affording China’s leadership supreme control over all transactions."

    Proponents of a Fed based digital dollar think it would provide the unbanked with access to virtual dollars. However, a Bank Policy Institute (BPI) report suggests the banking community doubts the potential financial inclusion benefit would wind up being widespread. That report also suggests that fear of crytocurriences and stablecoins, widespread fear of China's DCEP advances, and European fear of US control over the global financial system are important motivators behind current central banker focus on CBDCs.
  • Thanks for the links. Lots to wade through.

    Just looking at the first part of the BPI report helps to explain some of my confusion. It notes that "digital money includes commercial bank money, central bank money, and any future CBDC [central bank digital currency]. Thus, while some describe a CBDC as moderniing from physical to digital money - in this country to a 'digital dollar' - a large and growing majority of transactions already are conducted with digital money. This also includes credit card transactions which are solely digital. Vault cash aside, every dollar on deposit at a U.S. bank is a 'digital dollar'."

    As near as I can figure, CBDC is a form of digital currency where, instead of the digits representing a number of dollars the digits represent a number of "digital dollars". That's a currency that's one-to-one equivalent to, but distinct from, dollar currency (which is itself mostly digital now). A distinction largely without a difference.

    For the opposite view, there's this 2017 undergrad Yale paper (TL; DR yet). It says that precisely because we've already got most money in digital form, introducing a CBDC ("Fedcoin") would address existing inefficiencies: "our digital money, locked up in private ledgers and exchanged through dozens of heterogenous databases en route from creditor to debtor, lacks the speed, stability, scalability, and security of a good cryptocurrency."

    In order to make the system work, the BPI report says that each consumer would have to have an account, either with the central bank (direct model architecture) or at consumer bank (indirect model). While one can say that these are not traditional bank accounts, it befuddles me how one can say this system will serve "unbanked" people. By definition, wouldn't these people already be, or have to become, "banked"?

    Likewise the Yale paper notes that "To spend or receive a Fedcoin, one must have an account with the Fed." (That would be the direct model architecture.) It goes on to say that "for the benefit of the underbanked, getting a Fed account should be easier than getting a bank account." Again, the only help being offered the "unbanked" is to force them into bank accounts.

    As @davfor notes in his summary of the BPI report, it seems that the motivation for this parallel, pseudo dollar currency system is basically fear.
  • edited June 14
    The "unbanked" would have an incentive to open an alternative type of bank account if it could be designed to provide them with rapid, low cost access to benefits such as the recent stimulus payments. And, having the unbanked open those accounts may permit the government to come closer to achieving the goal of providing those benefits to all eligible recipients. So, in that sense, developing that type of non-traditional account has the potential to result a win-win outcome.

    It appears we are presently living through the "fear of the unknown" stage in the CBDC development and implementation process. Central banks are varying in the speed with which they are acting. China wants to ensure top down control of its population and its financial system. And it is looking for ways to increase its acceptance as a global reserve currency. So, it is acting fast. The Fed appears to be taking a go slow approach so it can gather more information and access the varied aspects of the threat in some detail before it acts (or doesn't act).
  • davfor said:

    The "unbanked" would have an incentive to open an alternative type of bank account if it could be designed to provide them with rapid, low cost access to benefits such as the recent stimulus payments. And, having the unbanked open those accounts may permit the government to come closer to achieving the goal of providing those benefits to all eligible recipients. So, in that sense, developing that type of non-traditional account has the potential to result a win-win outcome.

    My point is simply that, to use your own words, we can create an "alternative type of bank account" without creating an alternative type of electronic cash. (Cash in a bank is already electronic.)
    https://joinbankon.org/

    A new type of currency is not necessary to provide such accounts. Nor does this new currency seem to hold any intrinsic advantage for these customers over traditional (dollar-based) digital currency. Rather, it appears to be an example of a purported benefit promulgated as a rationale for CBDCs.
  • msf: Yup. Agreed!

  • Per @msf :
    My point is simply that, to use your own words, we can create an "alternative type of bank account" without creating an alternative type of electronic cash. (Cash in a bank is already electronic.)
    https://joinbankon.org/

    A new type of currency is not necessary to provide such accounts. Nor does this new currency seem to hold any intrinsic advantage for these customers over traditional (dollar-based) digital currency. Rather, it appears to be an example of a purported benefit promulgated as a rationale for CBDCs.
    The Fed is reviewing this specific issue within the framework of deciding if creating CBDC technology will be useful as a way to address the topics highlighted in my excerpt from the CFSAIS report (as well as other topics not mentioned). Deciding the new technology will probably be useful would lower the threshold the Fed would face when considering whether to extend that technology to include an alternative type of personal bank account.

    Presumably the Feds review is in detail examining the potential costs and benefits of creating various public sector alternate versions of a commercial bank account. Assuming empire building is not the overarching goal, the Fed will have not want to implement a public sector solution to a problem that is currently being adequately addressed by the banking community -- especially since doing so will most likely create new challenges the Fed will need to resolve regarding their relationships with that community.

    Also, even if the Fed decides development and installation of CBDC technology is adviseable, it appears that additional authority will need to be provided by Congress (See Link 1, Link 2, and Link 3). In that case, another layer of review and agreement would be required before CBDC rollout. Presumably that additional review would include examining and agreeing to details of the Feds proposal.

  • " it appears that additional authority will need to be provided by Congress"

    Sure thing- good luck on that one. They don't even want to know what really happened on Jan 6.
  • msf
    edited June 15
    davfor said:


    Also, even if the Fed decides development and installation of CBDC technology is adviseable, it appears that additional authority will need to be provided by Congress (See Link 1, Link 2, and Link 3).

    The BPI write ups are quite informative, but may not be entirely persuasive.

    The BPI discussion presents two principal points:
    1. The Fed is authorized to issue only coin and currency (two different things) as they existed in 1913;
    2. Even if the Fed could issue CBDC it might need additional Treasury approval.

    As to whether additional Congressional authority would be needed, we can dismiss #2. Since the Treasury is part of the executive branch, not of the legislative branch, seeking its approval would not involve Congress.

    Note that Powell (Link 1) said only the the Fed would not act without Congressional authorization, not that it could not. The former is a political statement, the latter a legal one.
    U.S. officials would only consider issuing a digital dollar if they believed there was a clear use and if the idea had widespread public and political buy-in.
    If by "need" additional Congressional authority you mean from a pragmatic perspective, I would tend to agree. Reading "need" as legally necessary, I'm not yet convinced.

    BPI rationale #1 harkens back to 1913, when the Fed was tasked with "furnish[ing] an elastic currency". BPI goes on to observe that "Further, the statute provides that '[a]ny Federal Reserve bank may make application to the local Federal Reserve agent for such amount of the Federal Reserve notes herein before provided for as it may require,' which appears to suggest physical cash."

    Fair enough. But is that a literal restriction, or rather simply descriptive of the technology of the time? In 1791, the 4th amendment protected you against illegal seizure of physical papers. It didn't protect you against wiretaps because they didn't exist and weren't conceived of at the time. It protects you now. Time marches on.

    Rather than wonder about whether the Fed has the authority to issue digital currency to provide elasticity, we can go to the horse's mouth:
    PELLEY [60 Minutes]: Where does it come from? Do you just print it?

    POWELL: We print it digitally. So as a central bank, we have the ability to create money digitally.
    https://www.cbsnews.com/news/full-transcript-fed-chair-jerome-powell-60-minutes-interview-economic-recovery-from-coronavirus-pandemic/

    True he was talking about digitally "printing" dollars rather than printing "digital dollars". But since this argument for needing Congressional authorization is that the Fed can only print physical money, it doesn't seem to hold water.
  • @msf Agreed....The jury still appears to be out on whether Congressional authorization would be legally required. But, the Fed appears committed to acting as if it is and to receiving it before proceeding with any CBDC rollout. They want to remain as insulated as possible from the political wars.
  • edited June 17
    A little European thinking about the appropriate relationship between potential central bank digital currencies and the private sector:
    Benoit Coeure, the head of the Bank for International Settlement’s Innovation Hub,....said the most likely setup will be a two-tier model, whereby digital currencies would be issued by central banks but distributed by commercial lenders.

    Cecilia Skingsley, the first deputy governor of Sweden’s Riksbank, said central banks will play a “focused and narrow role” in providing the infrastructure on which the private sector can build, “and that’s where we are going to stay.”
    Central Bankers Talk Down Concerns Over Digital Currency Risks
  • edited July 15
    Sounds like Powell is thinking seriously about supporting implementation of a CBDC:
    "You wouldn't need stablecoins, you wouldn't need cryptocurrencies, if you had a digital US currency," the Fed chief said. "I think that's one of the stronger arguments in its favor."

    "We have a tradition in this country where the public's money is held in what is supposed to be a very safe asset," Powell said. "That doesn't exist for stablecoins, and if they're going to be a significant part of the payments universe…then we need an appropriate framework, which frankly we don't have."
    Fed Chair Jerome Powell says cryptocurrencies and stablecoins won't be needed once the US has a digital currency
  • "Goldman Sachs Research’s David Mericle, chief US economist, discusses why central banks are considering digital currencies and the potential implications for the financial system and monetary and fiscal policy."

    Video (14 minutes): https://www.goldmansachs.com/insights/pages/whats-next-for-central-bank-digital-currencies.html
    Transcript (7 pages): https://www.goldmansachs.com/insights/pages/the-daily-check-in/whats-next-for-central-bank-digital-currencies/transcript.pdf

    I'm still left wondering, WHY?

    Some relevant excerpts:
    [T]here are two reasons to be a little bit skeptical about some of these [CBDC benefit] claims. The first reason is we could achieve the same benefits with a more traditional approach. For example, you could also offer people bank accounts simply by subsidizing them. And the Fed is already planning to speed up payments by introducing a new, real time payment system called Fed Now that will come online by 2023.

    The second reason to be a little bit skeptical is that some of these benefits require a more radical version of a CBDC than any central bank is actually planning to introduce for now. For example, no central bank is planning to completely phase out cash, so you can't really claim that as a benefit.
    ...
    [A]dvanced economy central banks are more focused on improving the safety and robustness of the payment system, although most consider it an open technological question whether or not a CBDC would really achieve this. I think this is basically how the Fed is thinking about it.
    About Fed Now (Federal Reserve website)
    https://www.frbservices.org/financial-services/fednow/about.html
  • Crypto is bad, ugly, awful and uncivilized, period.
  • A couple of definitions:

    cryptocurrency:
    a digital currency in which transactions are verified and records maintained by a decentralized system using cryptography, rather than by a centralized authority.
    "decentralized cryptocurrencies such as bitcoin now provide an outlet for personal wealth that is beyond restriction and confiscation"
    CBDC:
    A central bank digital currency (CBDC) uses an electronic record or digital token to represent the virtual form of a fiat currency of a particular nation (or region). A CBDC is centralized; it is issued and regulated by the competent monetary authority of the country.
  • Interesting conversation will Niall Furgeson regarding digital money:

    wealthtrack-weekly-investment-show-with-consuelo-mack
  • davfor said:

    A couple of definitions:

    cryptocurrency:

    a digital currency in which transactions are verified and records maintained by a decentralized system using cryptography, rather than by a centralized authority.
    "decentralized cryptocurrencies such as bitcoin now provide an outlet for personal wealth that is beyond restriction and confiscation"
    CBDC:
    A central bank digital currency (CBDC) uses an electronic record or digital token to represent the virtual form of a fiat currency of a particular nation (or region). A CBDC is centralized; it is issued and regulated by the competent monetary authority of the country.
    Crypto token:
    • Crypto tokens are a type of cryptocurrency that represents an asset or specific use and resides on their blockchain.
    • Tokens can be used for investment purposes, to store value, or to make purchases.
    The use of tokens is not a distinguishing attribute of CBDC. Regarding decentralized transaction verification and recording, it is true that:
    A direct [centralized CBDC] model would require the central bank to take on responsibility for account administration – for example, account services (including providing ongoing balances), AML/KYC [anti-money laundering/know your customer] monitoring, transaction verification, dispute resolution and provision of any mobile banking applications.
    However,
    [T]here is a strong consensus among central banks and other analysts that a direct model is unworkable and a dead option.
    ...
    In an indirect [decentralized] model, consumers would hold their CBDC at an account at a bank or other intermediary (e.g., a non-bank FinTech) – for example, in a “digital wallet.” The obligation to provide CBDC on demand would fall to the intermediary rather than the central bank. The central bank would track only the wholesale CBDC balances of the intermediaries.
    https://bpi.com/central-bank-digital-currencies-costs-benefits-and-major-implications-for-the-u-s-economic-system/

    IMHO, the key distinction between cryptocurrencies and central bank digital encrypted currencies is that the latter are ultimately issued by central banks. That is, CBDCs are fiat currencies as opposed to something more akin to a commodity with a floating price, such as gold. While cryptocurrency prices fluctuate relative to the central bank dollar (as does, for that matter, the price of Swiss francs), neither fiat currencies nor cryptocurrencies have any intrinsic value. They are not attractive, they do not conduct electricity, they are not ductile, etc.

    https://www.stlouisfed.org/open-vault/2018/april/three-ways-bitcoin-regular-currency
    https://www.amnh.org/exhibitions/gold/incomparable-gold/gold-properties

    Beyond that, it seems that all we're talking about are legal and technological distinctions that can be virtually eliminated with enough effort.

    In that regard, it is worth noting that the market disagrees with the assertion that cryptocurrencies are beyond restriction. Else we wouldn't be seeing headlines like: Bitcoin falls 10% as China intensifies crypto crackdown.
  • edited July 25
    Per @msf:
    IMHO, the key distinction between cryptocurrencies and central bank digital encrypted currencies is that the latter are ultimately issued by central banks.
    That makes sense to me. Relatedly, the stability of each CBDC will be directly linked to the stability of the paper currency of the country issuing that CDBC. Presumably, maintaining the dollar's stability will be an important consideration for the Fed when deciding whether to recommend developing one.

    Also on the subject of CDBC's, I ran across this 15 minute video clip yesterday. It includes comments made by the director of the Digital Currency Initiative at the MIT Media Lab.

    A couple of excerpts from the short written description of the video:
    The idea of a CBDC in the U.S. is aimed, in part, at making sure the dollar stays the monetary leader in the world economy.

    (But, one of the) concern(s) is access. According to the Pew Research Center, 7% of Americans say they don’t use the internet. For Black Americans, that rises to 9%, and for Americans over the age of 65, that rises to 25%. Americans with a disability are about three times as likely as those without a disability to say they never go online. That is part of what MIT is researching.

    Warning. There is an ad at the beginning..... challenges to the U.S. dollar
  • Short summary of research note...
    Bank of America (BofA) called central bank digital currencies “a much more effective payment system than cash,” in a research paper published Wednesday.

    ...CBDCs could “replace cash completely in the (distant) future.”

    CBDCs qualified as money “by allowing store of value and being a unit of account and means of exchange,” differentiating them from cryptocurrencies that “do not meet these criteria. “Since they are traded, they could be seen as an asset class,”

    CBDCs could lessen the need for stablecoins, noting that the latter could “present a material financial stability risk during times of market stress when there may be a crypto to fiat currency run.”
    Bank of America Calls CBDCs ‘More Effective’ Than Cash in Research Note
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